Vicky is the owner of one of the farms mentioned in problem 1 and has a...

Vicky is the owner of one of the farms mentioned in problem 1 and has a utility function of U = X^0.5, where U is Vicky’s utility and X is her income. If the weather is good, she will earn $100,000 per year. If there is a hailstorm, she will earn only $65,000. The probability of a hailstorm in any given year is 30%.

1.) Suppose now that Vicky has the option of buying crop insurance. Calculate the actuarially fair premium of an insurance policy that fully insures Vicky against hailstorms. Show that, at that fair premium, Vicky would be willing to buy the insurance policy. Show this on the graph.

2.) Calculate and indicate on your graph: the certainty equivalent and maximum amount Vicky would be willing to pay to fully insure against hailstorms.

3.) Calculate and indicate on your graph the risk premium Vicky would be willing to pay to fully insure against hailstorms

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Expert Solution

Rahul Sunny answered 1 year ago

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